China Faces IP Challenges in Drive for Renewables

The news that China has overtaken the US in installed wind capacity, according to research by the Global Wind Energy Council, has put future opportunities in this market into sharp relief for international renewables companies. China, alongside a clutch of other emerging economies, is set to play an increasingly important role in deciding the future success of key Western players, as they vie for the technological and commercial rewards of these, potentially, lucrative renewables markets.

But beyond the headline numbers, there are particular challenges facing new entrants. Many of these will come in the guise of intellectual property, which requires strong policies and frameworks to protect the future value of such investments.

The Chinese Ministry of Industry and Information Technology last year restated a 10-year commitment to aggressivley pursue green energy policies and reduce its dependence on foreign produced energy.

It followed China's elevation in 2009 to the very top of the G20 table of countries investing in renewable energy, pushing the US and UK into second and third place, respectively.

Additionally, a five-year plan that sees renewables take a 15% share of final energy consumption has also been announced.

Altogether, this package has been spurred on by a variety of initiatives, which followed renewable energy legislation passed in 2005. These included government-guided prices for wind power, compulsory purchases for all renewable energy generated, as well as financing vehicles geared towards the renewables sector.

Subsidies for the development of electric vehicles were also introduced and totalled $273.6 million between June and November 2010.

Rare earth minerals play a significant part in the manufacture of certain renewable energy models and China, with its major stocks of these, is playing a key part in managing the production and supply of such materials.

According to some estimates, up to 90 percent of the world's rare earth minerals are mined in China.

Recent political developments have led the Chinese government to reduce the export of these minerals by around 10% every year since 2006, much to the concern of the wider international market. By controlling the supply and cost of many raw materials, China has arguably put itself in a strong position to indirectly control a significant slice of the renewables market.

The rise in the cost of rare earth materials could pose a considerable threat to international customers, unless alternative technologies are developed.

While the green revolution has been playing out in China, its focus on research and development, underpinned by an innovative intellectual property system, has been fundamental in incentivising relevant domestic innovation.

In its wake are some clear indications that China is deliberately moving away from its moniker as the 'world's workshop' towards becoming the 'world's innovator'.

According to some estimates, China is set to overtake the United States and Japan in total number of patent filings across all sectors later this year.

Research into registered intellectual property rights in China suggests an acceleration trend, with a growing number of Chinese companies filing patents and other registrable IP rights overseas.

Its dedication to modernise the current policy and legal framework has recently been reaffirmed with, for example, the announcement that the UK's Office of Fair Trading has signed a Memorandum of Understanding with China for the cooperation and exchange of best practice on competition and consumer policy and enforcement.

Against this backdrop, what is the role of China in the global renewables market and how is this driven by its IP policies? More importantly, what impact will these factors have on Western companies looking to enter this market?

China's IP legal framework has been evolving in recent years to stimulate growth and innovation. The rapid increase in patent filing in China reflects a growing awareness of the need for and benefits of IP protection.

The Chinese government has also made several amendments to its patent law since 1992 that have focused on attracting foreign-direct investment into China. These are designed to benefit domestic Chinese companies by incentivising production in certain areas, including renewables markets. However, a number of foreign companies looking to locate or invest in China have met these reforms with scepticism.

Some of the changes so far have strengthened the quality of patents granted, making these more resilient to challenge.

Significantly, a new form of compulsory licensing of patents has also been introduced. While this initiative, aimed at dealing with abuses of patent monopolies, is so far limited to pharmaceuticals, it has been created to promote domestic interests.

Specifically, companies may now apply for and be granted a licence to work a patent that is not being properly exploited by its owner.

Importantly, this move is in addition to an existing compulsory licensing scheme, similar to those in a number of other countries.

In response to these changes, many foreign enterprises have voiced concern that the end-result may be to force the licensing in China of foreign-owned technologies, including renewables.

The US Chamber of Commerce has claimed these are anti-IP policies that detrimentally impact innovation in green technologies and will lead to job losses in the sector.

While the compulsory licensing scheme is currently restricted to pharmaceuticals, there are fears it could be extended to other industries.

Forced licensing of IP is, therefore, a potential risk to Western companies looking to do business in China. There have also been reports of changes to taxation structures that would benefit domestic renewables companies, and squeeze foreign competitors out of the market.

Furthermore, the types of corporate vehicle used by foreign companies when doing business in China have recently come under scrutiny.

Questions over how Beijing may respond in retaliation to political pressure from the West increasingly obscure these issues.

Beyond these current questions, there is growing consensus that China now has a strong legislative framework, which offers effective protection of IP rights.

A more significant issue is that of enforceability, where courts have struggled to keep up with the demands of a country experiencing rapid growth.

Between 2004 and 2009, the number of civil IP cases in the Chinese courts rose from 8332 up to 30,509.

What may still be a relatively weak system of recovering damages also means that litigation is not always the best weapon to use when disputes arise.

According to the UK Intellectual Property Office, approximately 95 percent of IP related cases are brought by Chinese businesses, which often end up being settled out of court. However, there are early signs this may be changing.

As the Chinese market moves from imitation to innovation, its IP enforcement regime will strengthen, with Chinese businesses seeking greater protection for their own intellectual assets.

Stronger protection for IP rights will filter into the court systems and, longer term, China is likely to be viewed as a reliable place in which to litigate.

Statistics from the Supreme People's Court of the People's Republic of China suggest that foreign plaintiff/pursuer success rates in IP cases handled in China compare favourably to 'win rates' in overseas jurisdictions, with plaintiff success rates of about 70 percent.

Similarly, damages awards are increasing in the Chinese courts, with Microsoft recently being awarded over $300,000 in a claim against a local insurance company.

While the move to tighten the Chinese IP framework may be good news in the longer term, it is unlikely to dramatically reduce the risks for foreign investors in the immediate future.

For Western companies looking to operate with only their IP in China, there is a mixed outlook ahead.

On one hand, if fears over compulsory licensing are realised in renewable markets, this may cause difficulties and disincentives for organisations that aim to exploit and utilise their IP in the Chinese market.

For others, however, it may be seen as an opportunity to collaborate with local companies, increasingly eager to build on their early commercial success.

One such example is the move by Aberdeen-based SeaEnergy Renewables to sign a strategic cooperation agreement with Chinese state-owned company Nanton COSCO Ship Steel Structure Co to develop and market steel structures for the offshore wind industry.

The agreement will enable the companies to cooperate on a business plan to develop and market turbine jacket substructures, towers and access systems for offshore wind farms.

China is one of the most attractive countries for foreign investment, backed by an economy on track to become the world's largest towards the end of the decade.

Significant progress has already been made in creating a strong intellectual property framework, which will instil further confidence among foreign companies looking to share and exploit their technologies locally.

In the meantime, as with any new market, renewables companies looking to China must ensure they secure the appropriate advice, both at a local and at an international level.